Tips for Paying Off Student Loans The Smart Way
Don't get caught up in a lifelong debt
Can you believe that Americans have built up over 1 trillion dollars in student loan debt? Considering that the cost of tuition, room and board, and other fees have risen 130 percent in the last 20 years alone, it’s time to begin thinking about paying down your student loans and other college debts to avoid the lasting effects of borrowing from financial institutions and the government.
For the record, the average college graduate has over $27,000 in debt and it will take them more than 20 years making the minimum payment to see the light at the end of that tunnel. Use these tools to pay down your debt and build your credit score at the same time.
Pay off loans with variable interest rates first
With interest rates set to climb 5 to 6 percent over the next five years, it’s time to hunker down and pay these off. Dedicate every spare penny to paying these down, as they do nothing but get more costly every year. Try to pay twice the monthly payment and if you get that Holiday bonus, dedicate all of it to this. Forget the winter ski vacation and eat soup once a week and you’ll have this paid in no time.
Talk to your employer about paying off your loan
Believe it or not, this is an option. Some employers will actually take you up on this in exchange for a reduced salary. Not all mid-level companies can afford large compensation packages and salaries but may offer you a one-time payout toward your student loans. You can live on a lower salary if it means you don’t have to make your minimum payments. This is done most often in special fields like IT, finance and accounting, and nursing.
Roll all of your payments into one
You can do this mostly with your federal student loans, and it helps with your monthly payments. If you graduated before July 1st, 2006, you definitely need to lump all of your loans into one to get a fixed interest rate. If you graduated after July 1st, 2006 your interest rate wont change anyways, but it can help having only one payment to deal with each month.
Don’t be late
Sign up for auto-draft payments as soon as you can, and be sure the money is in there. There are high penalties for being late on a student loan payment and even higher rates if you bounce a check. By signing up for auto-draft, you may also qualify for lower interest rates. All government lenders will offer you around 0.25% less on your interest payments, and private lenders will offer you up to 1% off. If you spread your payments out over 25 years, you’ll eventually save an entire year’s worth of payments.
Make the right decision about your repayment plan
With government loans, you can choose to pay as little as $50 a month toward your student loans, or you can choose an income based percentage that will cap your monthly payments at a reasonable amount in ratio to your total debt and income. Often, people will just choose the lowest possible payment amount, but you might end up paying thousands upon thousands of dollars in interest payments. Some payment plans even offer a debt forgiveness on any remaining balance after 25 years. The problem with this, however, is that you could potentially pay off your student loans much faster if you choose another option. The average person on this plan actually ends up paying their principle balance off in about 17.5 years, and spends the rest of their time paying exorbitant interest payments.
Do not mess around with your student loans. It’s important to get out from under them as soon as you can. Doing this will free you up for other investments and purchases you’ll want to make.
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